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Income Tax Appellate Tribunal, “G” Bench, Mumbai
Before: Shri Manoj Kumar Aggarwal & Shri Ravish Sood
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-8, Mumbai, dated 17.04.2018, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟) dated 25.03.2015 for A.Y. 2012-13. The assessee has assailed the impugned order on the following grounds of appeal before us: “1. The Commissioner (Appeals) erred in confirming the disallowance m a d e b y t h e A s s e s s i n g O f f i c e r o f e x p e n s e s a g g r e g a t i n g t o Rs.33,49,498/- by invoking sec. 14A r.w. Rule 8D of the I.T. Act, 1961.
2. The Commissioner (Appeals) failed to appreciate that the assessee had not incurred any expenditure for earning exempt income in the form of dividend and interest therefore, the question of disallowance u/s. 14A of the Act does not arise at all.
3. The Commissioner (Appeals) failed to appreciate that the assessee company had not made any claim of exempt income in connection with dividend earned and had offered the income to taxation and the said dividend is taxed by the Assessing Officer while completing the assessment u/s. 143(3) of the Act.
M/s Siroya Developers Pvt. Ltd. Vs. Dy. Commissioner of Income Tax-3(3)(2)
4. The Commissioner (Appeals) failed to ap preciate that the investments made in the partnership firms had generated interest income which was offered and taxed during the year and therefore the question of disallowance u/s. 14A of the Act does not arise at all. 5 . T h e o r d e r o f t h e C o m m i s s i o n e r ( A p p e a l s ) u p h o l d i n g t h e disallowance made by the A.O. is bad in law and without jurisdiction. 6. Your appellant craves leave to add to, alter, amend or delete any of the foregoing grounds of appeal
.”
2. Briefly stated, the assessee company which is engaged in the business of a real estate developer had e-filed its return of income for A.Y. 2012-13 on 30.09.2012, declaring its current year loss at (-) Rs.1,88,70,693/-. Further, the assessee had shown its „book profit‟ under Sec. 115JB of the Act at Rs.1,86,29,307/-. The return of income filed by the assessee was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings it was observed by the A.O that the assessee company had claimed dividend income of Rs.75,000/- as exempt under Sec.10(34) of the Act. Observing, that the assessee had not disallowed any part of the expenses as having been incurred for the purpose of earning of the exempt dividend income, the A.O called upon it to explain as to why a disallowance may not be worked out as per the provisions of Sec.14A r.w. Rule 8D. In reply, the assessee on the basis of multiple contentions tried to impress upon the A.O that no disallowance under Sec.14A was called for in its hands. However, the A.O was not persuaded to subscribe to the aforesaid claim of the assessee and worked out a disallowance of Rs. 33,49,498/- under Sec.14A r.w. Rule 8D, as under:
I. Expenses directly attributable to exempt income (Depository Charges) Rs. Nil II. Formula: A X B/C Rs.31,13,060/- A: Expenses not directly related to exempt income (interest) i.e. 47788068 B: Average value of investment on the opening and closing day of the previous year i.e (27662668 + 66912589)/2= 47287629 C: Average value of assets on the opening and closing day of the previous year i.e (646102857 + 805706237)/2= 725904547 47788068 X 47287629 725904547 III. 0.5% of average value of investment on the opening and closing day of Rs. 2,36,438/- the previous year i.e 0.5% of B = 236438 Aggregate of I+II+III Rs.33,49,498/-
M/s Siroya Developers Pvt. Ltd. Vs. Dy. Commissioner of Income Tax-3(3)(2)
On the basis of his aforesaid deliberations the A.O worked out the loss of the assessee company under the normal provisions at Rs.1,55,21,195/-. Also, the „book profit‟ of the assessee under Sec. 115JB was worked out by the A.O at Rs.1,52,79,809/-.
Aggrieved, the assessee assailed the assessment order before the CIT(A). However, the CIT(A) after deliberating on the contentions advanced by the assessee was not inclined to accept the same and upheld the disallowance of Rs. 33,49,498/- that was worked out by the A.O under Sec. 14A r.w Rule 8D and dismissed the appeal.
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the facts of the case. It was submitted by the ld. A.R. that the lower authorities had made/sustained an exorbitant disallowance of Rs. 33,49,498/- under Sec.14A r.w. Rule 8D. It was the claim of the ld. A.R that the assessee company during the year under consideration was in receipt of exempt dividend income of Rs.75,000/- only. Also, it was submitted by the ld. A.R that the assessee company had made investments in two partnership firm viz. (i) M/s Siroya Yug Realtors; and (ii) M/s Shree Kamdhenu Developers, from which it was in receipt of interest income that was offered for tax while computing its income for the year under consideration. On the basis of the aforesaid facts, it was submitted by the ld. A.R that as the assessee had not earned any exempt income from its investments made in the aforementioned firms and was in fact in receipt of taxable interest income, therefore, the respective capital contributions made in the said partnership firms could not have been considered for the purpose of computing the disallowance under Sec.14A r.w. Rule 8D(2). Alternatively, it was submitted by the ld. A.R that the disallowance under Sec. 14A could not have exceeded the amount of exempt dividend income that was received by the assessee during the year under consideration. It was averred by the ld. A.R that the disallowance under Sec. 14A be restricted to the extent of the aforesaid exempt dividend that was received by the assessee during the year under consideration.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the assessee was in receipt of exempt dividend income, therefore, the lower authorities had rightly made/sustained the disallowance of Rs. 33,49,498/- under Sec. 14A r.w. Rule 8D.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We are persuaded to subscribe to the contention advanced by the ld. A.R that a disallowance under Sec. 14A cannot exceed the amount of the exempt
M/s Siroya Developers Pvt. Ltd. Vs. Dy. Commissioner of Income Tax-3(3)(2) income. Our aforesaid view is supported by the judgement of the Hon’ble High Court of Delhi in the case of Joint Investments Pvt. Ltd. Vs. CIT (2015) 372 ITR 694 (Del). In the aforesaid case, it was observed by the Hon‟ble High Court that the disallowance envisaged in Sec. 14A r.w. Rule 8D cannot exceed the amount of the exempt income. The Hon‟ble High Court in the said case had observed as under : “By no stretch of imagination can Sec. 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Sec.14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” Further, we find, that the Hon’ble High Court of Delhi had recently in the case of PCIT, New Delhi vs. McDonald India (P) Ltd. (2019) 101 taxmann.com 86 (Delhi) upheld the order of the Tribunal which had deleted the disallowance made by the A.O under Sec. 14A for the reason that the assessee had not earned any exempt income during the relevant assessment year. The Hon‟ble High Court while concluding that the amount of the disallowance under Sec. 14A cannot exceed the amount of the exempt dividend income had observed as under:- “9. The position becomes clear and beyond doubt when we refer to the factual position in the appeal preferred by the Revenue against the decision of the Punjab and Haryana High Court in the case of Pr. CIT Vs. State Bank of Patiala [2017]. 391 ITR 218/245 Taxman 273/78 taxman.com 3 which was also decided with the decision in Maxopp Investment Ltd. (Supra). In State Bank of Patiala (Supra) the assessing Officer had applied Rule 8D of the Income Tax Rules 1962, but had restricted the disallowance to the amount claimed as exempt income. The Commissioner of Income-tax (Appeals) had enhanced and increased this disallowance as per Rule 8D of the Income Tax Rules, 1962. The said disallowance was more than exempt income. The Tribunal had reversed the finding of the Commissioner of Income-tax (Appeals) and restored the disallowance as made by the Assessing Officer i.e restricted the disallowance to the extent of exempt income. Decision in the case of State Bank of Patiala (supra) of the Punjab and Haryana High Court was affirmed by the Supreme Court as the correct conclusion, though the Supreme Court did not agree with the reasoning of the Punjab & High court on the theory of dominant intention. It was held that the view of the Commissioner of the Income Tax (Appeals) that disallowance of expenditure beyond and above the exempt income earned by applying Rule 8D was clearly untenable and rightly rejected by the Tribunal.” Also, we find that a similar view had been taken by the Hon’ble High Court of Punjab and Haryana in the case of Pr. CIT Vs. Empire Package (P) Ltd. (2017) 81 taxman.com 108 (P & H). Apart from that, we find that a similar view had been taken by the ITAT, Mumbai in the case of viz. (i) Tata Industries Ltd. Vs. ITO (2016) 181 TTJ 600 (Mum) and (ii) Future Corporate Resources Ltd. Vs. DCIT (2017) 85 taxman 190 (Mum). Accordingly, finding ourselves to be in agreement with the claim of the ld. A.R that the disallowance under Sec. 14A cannot exceed the amount of the exempt income received by the assessee during the year under consideration, we direct the A.O to restrict the disallowance under Sec. 14A to the extent of the exempt dividend income of Rs.75,000/- that was received by the assessee during the year under consideration.
M/s Siroya Developers Pvt. Ltd. Vs. Dy. Commissioner of Income Tax-3(3)(2)
Resultantly, the appeal of the assessee is partly allowed in terms of our aforesaid observations.